Do I Qualify for the IRS Earned Income Credit?

Each filing season, the IRS reaches out to educate certain taxpayers regarding their eligibility for the Earned Income Credit. The IRS Earned Income Tax Credit (EITC) is a federal income tax credit for low to moderate income working individuals and families. The original intent of the EITC was to offset a portion of Social Security and Medicare taxes, thus augmenting take-home income in lower-wage jobs. At the same time, the EITC provided an incentive to work and decrease one's dependency on government and state sponsored programs. Although many take full advantage of the EITC, the credit still goes unclaimed by about one quarter of those who are eligible.

EITC is an "after-tax" credit, in that it reduces the amount of tax one may have to pay, dollar per dollar. It differs from "pre-tax" credits or deductions, like student loan interest or health savings account deductions, which only reduce one's taxable income, or the amount of income that is subject to taxation. When the EITC exceeds the amount of taxes owed, it results in a tax refund. Even if one has no taxable income and or no federal tax withholdings, they may still qualify for a refund comprised of the EITC.

Despite the fact that many are entitled to obtain the EITC, it remains one of most often-disallowed credits because of the numerous qualifiers one must meet. The easiest way to determine if you are eligible to claim the credit is to use the EITC Assistant, an interactive tool available on the IRS web site. The EITC Assistant will determine if you are eligible for the Earned Income Tax Credit by asking some basic questions. Since certain filing statutes are tied to the EITC, the program also assists you to determine your correct filing status, as well as establish which dependent(s) meet the test for a qualifying child. If you have a qualifying child or children, the credit amount will increase.

At the outset, there are few fundamental requirements that are common to everyone. The credit is subject to a ceiling, based on the amount one earns and if they have a qualifying child. As an example, for tax year 2008, one's Adjusted Gross Income (total income less certain deductions and expenses) must be less than $38,646, or $41,646 if filing jointly, if more than one qualifying child is being claimed. If only one qualifying child is claimed, the income threshold drops to $33,995 ($36,995 for joint filers). For those without a qualifying child, the credit caps out once adjusted gross income reaches the $12,880 mark ($15,880 for joint filers).

Additionally, you must be a US citizen or resident alien and have a valid Social Security number for yourself and any qualifying children, and your filing status cannot be Married Filing Separate. If you have certain foreign income, or investment income that tops the $2,950 mark, you are also ineligible.

The credit is based on an individual's earned income; in other words you must have actively worked during the year to qualify. If you are married and file a joint return, you meet this rule if at least one spouse worked and had earned income. Earned income is defined as wages, salaries and tips, net earnings from self-employment, early disability retirement pay, and non-taxable combat zone pay. Individuals whose only income sources are Social Security or Supplemental Security, interest, dividends, regular retirement pensions, welfare, workers compensation, child support or alimony, unemployment, or a combination of these are NOT eligible for the credit.

A different set of rules also comes into play if you have a qualifying child or children. Your child is considered a qualifying child for the EITC if your child meets three tests. The three tests are a relationship test, an age test, and a residency test. A common misconception is that if a child meets the test to be a dependent, they are also regarded as a qualifying child for EITC. Although the prerequisites are similar, one does not allow an automatic qualification for the other. If parents are divorced or separated, custodial rules also factor in. In order to determine if your child meets the conditions to qualify, review Chapter 2 of IRS Publication 596, Earned Income Credit.

The EITC can be claimed by using any of the three federal tax forms: the regular 1040 or "long form", the 1040-A, or the 1040-EZ form. If you file Form 1040, you will need to decide whether to use EIC Worksheet A or EIC Worksheet B to figure the amount of your credit. The worksheets differ depending on if you are self-employed or earning a straight wage. If you are claiming a qualifying child or children, then you must complete Schedule EIC and attach it to your return. Schedule EIC provides the IRS with information about your qualifying children, including their names, ages, Social Security numbers, relationship to you, and the amount of time they lived with you during the year. The required worksheets or schedules are available in Publication 596, the 1040 instruction booklets, or directly off of IRS.gov.

If at any time after tax year 1996 the IRS disallowed your EITC, then you must submit Form 8862, Information To Claim Earned Income Credit After Disallowance, and attach it to your current year return. This form is used to report to the IRS what factors have now changed that allow you to legitimately claim the credit. If the IRS denied the EITC due to what was determined to be reckless or intentional disregard of the rules, you cannot claim the EITC for the next two years after the denial. If your error was due to fraud, you cannot claim the EITC for the next ten years after the fraud determination.

For more information regarding the EITC, please visit the IRS Earned Income Tax Credit Center.